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The search for revenue: Where next for Facebook?

With Graph Search unlikely to allay investor concerns, just where will Facebook find its commercial focus?

2012 was a significant year in the history of Facebook, largely because it was the year that the social network floated on the stock market, but also because of the issue that the IPO threw into sharp relief: how was it going to translate its billion users into revenue?

In the past, Facebook has tested a number of innovations designed to boost revenue. Unsurprisingly, the social network has long worked at ways to boost ad revenue, with the latest innovation to be unveiled being a pilot scheme which allows users/brands to pay $1 to send messages to people they are not friends with. While users will only be able to receive a maximum of three paid-for messages a month, the trial sparked concerns from users that businesses will bombard the network with spam advertising.

But there have been other initiatives, for instance, Facebook commerce. A host of start-ups, such as Fab.com and BeachMint, are confident that Facebook will be the next great ecommerce platform, and that the infrastructure and sheer volume of users will guarantee success. Yet last year there were reports that a growing number of large retailers were shutting their Facebook storefronts, with the likes of GameStop, Gap Inc., J.C. Penney and Nordstrom all having closed their Facebook stores.

There have been suggestions that this could be symptomatic of a wider trend, with brands deserting the social network.

“In 2013, businesses that had previously shifted marketing funds away from their traditional dot-com domain towards Facebook will reverse that trend,” predicts Rob Howard, founder and CTO of Telligent. “Research from Forrester Research, Inc., and other leading analyst firms continues to validate the need for organisations to invest in their own websites and community experiences. Why? Consumers have different expectations and behaviours in consumer social media and branded communities.”

Katy Keim, CMO at Lithium, is in agreement. “Our enchantment with Facebook is eroding,” she says. “Only about 2% of Facebook fans will return to the page. And in the US, 60% of consumers said they find it annoying on Facebook to get a message from a brand. We have to question what that is doing for our brand engagement and business. Marketers are getting towards the end of the runway, and they have been in collection mode, but now they have to think about how they might do something different.”

Understandably, this kind of activity can lead to concern amongst Facebook’s investors. So when it hosted a mystery press conference at its Californian HQ last week, rumours were rife that a new revenue-enhancing project would be revealed. In the end, the initiative in question was Graph Search, Facebook’s equivalent of social search.

"On the one hand, users will be very happy to get this new functionality that Facebook is calling ‘Graph Search’. It is innovative and powerful, and will allow people to search within Facebook, albeit restricted to what they can see and read right now," says Andreas Pouros, COO at digital marketing agency, Greenlight. "On the other hand however, it is unlikely to be enough to allay investor concerns over Facebook’s commercial focus. “

Search

So, with greater pressure than ever before to ramp up revenue, what could be in Facebook’s plans?

Speaking after the launch of Graph Search, Pouros said: “Many had expected Facebook would have thrown down the gauntlet to Google and challenged the company in web search supremacy. Web search is a touchy subject as everyone knows that it is a hugely lucrative market, and one Facebook was expected to enter.”

So could Graph Search be a precursor to that? Certainly Facebook CEO Mark Zuckerberg has hinted that he would be tempted to take on Google, and only a few months ago at a tech conference in San Francisco, he said the search market represents a “big opportunity” that Facebook is uniquely positioned to address.

Google seems almost impenetrable in the world of search, but while it retains the top spot as the most popular search engine in the UK, new figures have demonstrated that its market share has dropped below 90%, and continues to edge lower.

According to the research from Experian Hitwise, Google accounted for a total market share of 88.35% - a 0.77% drop from November’s figure and its lowest in five years.

James Murray, digital insight manager at Experian Marketing Services said: “Clearly, Google still maintains a huge competitive edge over the other search engines in the UK market. There are seven times more searches conducted on Google Sites than on all the other search engines combined.”

But added that the findings were “encouraging news” for other search engines.

A global survey “Search & Social Survey (2011-2012)”, undertaken in early 2012 by Greenlight, concluded Facebook could potentially capture close to a quarter of the search market were it to launch its own search engine tomorrow, making it the second most utilised search engine in every major market except for China, Japan, and Russia, where it would occupy an uncontested third place.

And Greenlight has suggested it wouldn't need to be a spectacular engine either, just well integrated into the Facebook experience and generally competent.

What’s more, the results also suggested Facebook could increase that projected market share to a maximum of 50% within a few years by converting the least overtly loyal Google users over to them (though that increase would need to come from the 27% of respondents who replied ‘Maybe, but only if it was better than Google/Bing’).

But others are less optimistic about Facebook’s potential in the search market. For instance, Eden Zoller, principal analyst at Ovum, suggests: "A full blown web search engine from Facebook would inevitably have to compete with Google search, and given Google’s dominance of the search market it would be hard for Facebook to make a serious impact – and win advertising dollars."

Mobile

So if not search, what else could Facebook explore?

Mobile is certainly one area that could offer potential.

Facebook has said that over 425 million users access the network on a mobile device every month, approximately half of all of its monthly active users. While driving Facebook usage, this does mean that users are accessing the network on devices that it has less control over, with less opportunity to make money from with advertising, mainly because these devices have less space for advertising, are influenced by third parties (Apple, Android, etc.), while Facebook delivered via apps, like Flipboard, are much harder to infiltrate with advertising.

Pouros believes that addressing this problem could help Facebook to address its ad revenue slowdown and help alleviate concerns around future profit growth.

“On the advertising front, Facebook is looking to mobile to grow revenues, and the challenge of how it monetises people’s usage of its network over mobile phones and applications continues to be a primary concern for investors,” he says.

In a poll of 500 people to gauge consumer appetite for a Facebook-produced phone, Greenlight found that over 50% could be swayed to switch, with 8% saying they definitely would. While rumours of Facebook having secured a partnership with HTC to produce a Facebook phone emerged last July, such activity is denied by the social network. As such, Facebook remains without answer to the mobile issue, says Pouros.

“New ad formats have been and will continue to be launched by the company for mobile users, but there is a serious question over whether Facebook can integrate a compelling advertising offering on the smallest of screens which users will be comfortable with and that does not interfere with their Facebook user experience. Sponsored Stories, its newest unit is doing well, but many users have grown to dislike it as it consumes more and more of a users’ news feed. But in the mobile battle, Google and Apple remain far ahead of the pack.”

So there are still more questions than answers for Facebook and its investors in 2013 – but the social network will have to produce a solution to its commercial conundrum if it is to appease its investors. And search and mobile just might have a part to play in the future.